Making Tax Digital for Income Tax
Written by Ray Coman
Making Tax Digital is a mandatory obligation for sole traders and business owners to store all transactions in electronic format and report a summary profit report to HMRC once every three months. It is due to be introduced from April 2023. The requirement to keep records and use compatible software is the same as that currently applied in VAT reporting.
The government announced its intention to mandate digital reporting in 2015. It was the same year in which HMRC introduced a personal tax account to help people manage their taxes online. The tax account allows the taxpayer to view a history of tax filings, payments and liabilities. Coman&Co encourages clients to use this service to compare advice we have given with records held by HMRC.
The aim of MTD is get the UK tax reporting system paperless. The stated reason is to reduce the occurrence of tax error which is costing the UK economy billions each year. The program, it is hoped, will improve both government and business forecasting with more frequent representation of results. This is sometimes called real time.
Sole traders and landlords with gross income of over £10,000 will be required to adopt Making Tax Digital from April 2023. The requirement applies where combined, annual turnover from rents received and unincorporated business activities exceeds £10,000. Where there is more than one trade, or the taxpayer is both a sole trader and landlord, the test will apply to combined income. The new regulation applies to property or trading income from partnerships and trusts. By exception, corporate partners will not need to comply by April 2023.
The quarterly report will contain a summary of income and expenditure.
It will be necessary to create a log of every business transaction in a digital format. In practice, this means that all invoices and banks transactions are entered into a software package. Each transaction carries an ‘electronic signature.’ An electronic signature is simply the ID number generated by the accounting software for each accounting entry.
The Tax Return will also be required as well as the quarterly report. For many, the Return could include information about more than just sole trader or landlord income. It could contain information about available tax relief, allowances, other sources of income for instance from employment, investments or Trusts. It is possible that the term Tax return will no longer be used.
There are no announced plans to change the existing timetable of tax payments. The tax will be payable by 31 January following the end of the tax year. Any payments on account will be due by 31 January and 31 July as usual.
There are no proposals to change the time limit for retaining records. Sole traders, landlords, partnerships and companies are required to retain records for 5 years after 31 January following the tax year (approximately six years for ease of reference.) Taxpayers filing a Tax Return that does not contain trading or property income are required to retain records for 22 months after the end of the tax year. Different rules apply for Returns which are filed late.
With the introduction of MTD, it will no longer be a requirement for tax purposes to keep hard copy records. Currently HMRC have indicated that it is acceptable to keep records in either soft copy or hard copy. However, whichever is chosen, the accounting records must be complete and legible. Many businesses will prefer the space saving and ease for retrieval of going paperless. Card transactions under £45 no longer require a receipt, and certain transactions such as bank charges do not necessarily provide a receipt. In case a receipt was not issued by the vendor, the bank statement is the record of transactions.
As with Making Tax Digital for VAT, which is already a requirement for most traders, it will be a requirement to file quarterly reports via compatible software. For VAT registered businesses, the obvious choice for convenience and efficiency is the same software already linked to the government gateway account. For non-VAT registered landlords and businesses, it will be a requirement to open a gov.uk tax account. The login credentials of that tax account are entered into the software.
There is a business case for use of software in improving credit control, year end accounting and if applicable VAT compliance. Coman&Co is a certified QuickBooks ProAdvisor and can re-sell the software to our clients for a wholesale price. This offer is to keep clients on board during this time of transition. We understand that more red tape is not welcome by the business community, but we are hoping to turn the inevitable into an opportunity.
The first report is due to be filed in the fourth month of the accounting period. The tax year for landlords is always 5 April. Therefore, the first quarter would end 6 July. For the sake of convenience many sole traders also choose a 5 April year end. Reports will be due three monthly thereafter, i.e. October, January, April, July.
Businesses with a turnover of £150,000 or less can use the cash basis. This means that cash received into the banks account, less cash paid out of the bank account forms the basis of profit. The result is that invoice dates are ignored. It is popular with small businesses and contactors as it provides immediate relief for bad debt and avoids the requirement to front tax to HMRC for money not yet received.
For traders using the cash basis, quarterly reporting is often a simple matter of reconciling the bank at the end of each quarter and filing the report to HMRC.
We recognise that increased reporting will place greater administrative burden on the business owner. The strain will be heightened by the shorter window in which to make reports. The government have not made an obvious announcement about the deadline for the quarterly report. However, the VAT Return deadline of one month and seven days after the end of each quarter end is probable gauge of when the reports will be due.
The mandatory requirement starting April 2023 will not extend to companies. The government is consulting on the introduction of MTD for corporation tax. Company owners should be prepared for its adoption after April 2026.
Traditionally a tax practice, we have focused on tax and Companies House compliance and related advisory services. However, in part a response to MTD and facilitated by a growing team, we can now offer the full suite of accounting services. This includes bookkeeping, and a range of accounts reporting, VAT Return submission and, when the time comes, Making Tax Digital reporting. Moreover, as a trusted and bulk purchaser, we are able to secure a deal with leading software provider QuickBooks to obtain their package at wholesale prices. As an incentive to adopt out bookkeeping package, we are offering this software for its wholesale price. The range of add on services can be reviewed on our pricing page.
We like to remain flexible and we can continue to provide a year-end only service to our clients who for cost and/or control reasons prefer to manage their own day-to-day accounting. We will continue to liaise with our clients as the programs rolls out to arrange a service which is both competitive and fit for purpose.
Please check back on this report, as it will be updated as details of the regulation are released.